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Currency Competition

The greatest trouble with monopolies is what they take away — competition. Competition is a beautiful mechanism; in exercising their purchasing power and demand preferences, individuals run the economy — it is their spending that allocates, labour, capital, resources and brainpower. It’s their spending that transmits the information that determines what gets made, what doesn’t, which businesses succeed and which don’t. Individuals exercise a far greater political and economic power in a free economy when they spend, and when they work than when they vote. So without competition, the power of choice suffers, and businesses, markets and societies can become economically stagnant and rampantly corrupt; look at North Korea and the myriad other examples of once-prosperous societies impoverished within the context of a lack of competition.

In a free market, monopolies are potentially less problematic because without competition a monopolist can become complacent and inefficient, allowing competitors a foothold to grab market share; consider the near-monopoly of Microsoft Windows and Internet Explorer in the 1990s, which began to melt away via the rise of Apple, Google, Firefox and the poorly-received Windows Vista in the 2000s. While a free market is not a foolproof guarantee of a competitive market — and sometimes regulation is necessary to prevent the formation of cartels — it is the closest thing to such a thing.

Monopolies can become much more problematic when a monopoly develops and the holders of that monopoly utilise the power of the state to protect their dominance. Whether their business is food, or clothes, or computers, or money, a state-protected monopoly limits competition and distorts the process of allocating of resources, capital and labour.

If we are for competition in goods and services, why should we disclude competition in the money industry? Would choice in the money industry not benefit the consumer in the manner that choice in other industries does? Why should the form and nature of the medium of exchange be monopolised? Shouldn’t the people — as individuals — be able to make up their own mind about the kind of money that they want to use to engage in transactions?

Earlier, this year Ben Bernake and Ron Paul had an exchange on this subject:

Bernanke contends that it is possible to transact in a competing currency like Yen, or pesos or bitcoin. This is technically correct. But, as Ron Paul points out, there are still a number of laws which are arguably preventing a level playing field:

The first step [to real currency competition] consists of eliminating legal tender laws. Article I, Section 10 of the Constitution forbids the States from making anything but gold and silver a legal tender in payment of debts. States are not required to enact legal tender laws, but should they choose to, the only acceptable legal tender is gold and silver, the two precious metals that individuals throughout history and across cultures have used as currency. There is nothing in the Constitution that grants Congress the power to enact legal tender laws. Congress has the power to coin money, regulate the value thereof, and of foreign coin, but not to declare a legal tender. Yet, there is a section of US Code, 31 USC 5103, that purports to establish US coins and currency, including Federal Reserve notes, as legal tender.

The second step to legalizing currency competition is to eliminate laws that prohibit the operation of private mints. One private enterprise which attempted to popularize the use of precious metal coins was Liberty Services, the creators of the Liberty Dollar. The government felt threatened by the Liberty Dollar, as Liberty Services had all their precious metal coins seized by the FBI and Secret Service in November of 2007.

The final step to reestablishing competition in currency is to eliminate capital gains and sales taxes on gold and silver coins. Under current federal law, coins are considered collectibles, and are liable for capital gains taxes. Coins held for less than one year are taxed at the short-term capital gains rate, which is the normal income tax rate, while coins held for more than a year are taxed at the collectibles rate of 28 percent.

If people and businesses choose to stick to government-backed fiat money and refuse other currencies, that is their prerogative. It is possible that other media of exchange would not become popular; but at least there would be a more level playing field. Under the status quo, there is no level playing field.

It is often said in interventionist circles that Bernanke is too tame a central banker, and that right now the people need a greater money supply. Well, set the society free to determine their own money supply based on the demand for money; let the people decide.

With apologies for repetition. A friend visiting the pre-collapse USSR reported: “Everybody has a job. Nobody works. Nobody has any money. If anybody had any money, there is nothing to buy.” Of course, he wasn’t allowed to see the Nomenklatura lifestyle.

Another example from the “good old days” of the USSR. New (or pre?) boss of the USSR, Gorbachev, wrote a book featuring an astounding proposal to adopt “cost accounting” — the government should begin considering COSTS of alternate products/processes of goods provided to consumers. But I don’t remember reading anything about giving consumers choice. [Others’ reviews & memories are no doubt clearer than mine].

Anarchism only works when everybody in society has been taught civility and manners. Most children don’t have this upbringing so it is a pipe dream. It is like Somalia suddenly transforming into a polite society.

I think the Anarchist ideals are noble but it does not work. You would have to start a country from fresh and have very “strict” citizenship tests.

Mises was unfairly treated because he was Jewish and “dogmatic” in his early years, according to Mr Jeffrey A. Tucker. Towards the 8 minute mark…a few points begin coming up particularly relevant to recent subjects

Good article, but it would be better if you included a definition of what you mean by money in this context. Means of exchange? Store of value? Unit of measure? Or all three?

In my view, competing currencies would be fine as a means of exchange. If I got my salary in bennybucks while my neighbour got his in krugmanrands, that’s no problem as long as the one can be exchanged for the other at a well-defined (although fluctuating) rate.

As for unit of measure – well, maybe. Depends on what you’re measuring, I guess. It would take some mental adjustment to live in a world where you don’t know from one day to the next e.g. how many cans of beans you can buy with your salary, because it depends on the current rate between the bean seller’s currency and your employer’s currency. But I guess one could eventually get used to that.

Store of value is another matter, however. To e.g. save for retirement, with a 30-40 year time horizon, you really require something more stable. Long-term savings should be denominated in something that can be trusted over decades or more. For this, competing currencies aren’t really suited. (It’s worth noting, though, that we don’t have a store of value like that in today’s world either. Hopefully we’ll get one after the coming collapse…)

Interesting idea. From my limited knowledge, isn’t the reason that currency was created so that the government could collect tax receipts (I don’t know if this is accurate by the way, I’m just throwing it out there; there was an Economist article on it too). How would competing currencies impact the government collection of taxes?

Also, wouldn’t there be a network effect for currencies? For example, the more people in the local area that use the currency make it also more valuable, right? There could be something I’m not considering here.

You are correct. It is not cost effective to collect “5 chickens” in lieu of tax owed. The tax office would have to feed them.. Minting coins, then printing paper, now crediting accounts is much more efficient.

But Fiat currency is just that. Backed by decree and enforced by an army if need be. This gives confidence to traders of tangible goods.

Taken to its logical conclusion, everybody should have their own currency, that is, do away currency [money] altogether, thereby eliminating labor-value’s main abstraction. This will allow for the freer movement of labor-value and labor itself.

The fixing of labor-value via transfer to its money-form is one of the many ways that capital and finance under-values actual labor-value [sort of like the ‘float’ banks use, or effect of inflation on the value of money as it makes it way through the system].

What happens to labour’s value when robots replace? Only capitalists can buy the goods and services.

If you provide labour services that can not be outsourced by a machine or robot, then you have a future. other than that you are paid to “keep calm” and allow capitalists to enjoy life. Mannah from heaven so to speak.

I can’t remember which philosopher/author wrote, “…..return to the place of beginnng, and know it for the for the first time”. But here we are with Aziz’s opening blog: “Yet the greatest trouble with monopolies is what they take away — competition. Competition is a beautiful mechanism; in exercising their purchasing power and demand preferences, individuals run the economy — it is their spending that allocates, labour, capital, resources and brainpower. It’s their spending that transmits the information that determines what gets made, what doesn’t, which businesses succeed and which don’t.” THAT is a great description of “Bottom-Up”! And not only eonomics, but also politics/government, education, and (unforunately, at the moment) culture.

Agreed. A neighbor called the local council (Local Government) so they could dispose of a dead kangaroo. Usually you would drag it off the roadside if it was disturbing you. The mentality of people relying on “Council/Local Government instead of resolving individually results in Local Government increasing local taxes to cover “Services” It become more inefficient as Local Government grows.

The USA has a long history of competing currencies. Before the Civil War any private bank could issue its own currency and a great many did. Fortunately there were no legal tender laws then because many of the banks were short lived. That is why it is known as the ‘broken bank era’. And of course before 1933 we had bank deposits, gold currency, silver currency and several forms of paper currency (national bank notes, treasury certificates, federal reserve notes, etc.).

There are no more advantages to competing forms of currencies than there are of competing forms of electric power for the home.

US “Free Banking” era was “broken,” as you say, due to harmful govt regulations, not currency competition:

1) Branch banking was prohibited, leading to an unstable system of unit banks
2) Private banknote issue had to be preceded by purchases of state bonds. This overconcentrated bank assets in one class which further destabilized the system.

Have you read the Free Banking literature by White and Selgin?
The Theory of Monetary Institutions
Competition and Currency: Essays on Free Banking and Money
Selgin’s Readings in Money and Banking (available at http://www.terry.uga.edu/~selgin/econ4100.html)
The blog: Freebanking.org

That was a good read. Thanks for the link. I am one for Free banking. I have a book. The history of the National Bank of Australasia Now “NAB”. A bank that was created by a few businessmen during the Gold Rush (1900’s). It is very interesting because it explains the problems banks face with little regulation and only sound business principles to foster public trust and prevent bank runs. Even when faced with Bank Runs due to mischievous competitors.